Free DP Download 15 April 2021 - COLLUDING AGAINST ENVIRONMENTAL REGULATION

Thursday, April 15, 2021

COLLUDING AGAINST ENVIRONMENTAL REGULATION FOR PROFIT: The case of BMW, Daimler, Volkswagen and 'Diesel-Gate'
Jorge Alé-Chilet, Cuicui Chen, Jing Li, Mathias Reynaert 
CEPR DP No. 16038 April 2021

The German automakers BMW, Daimler, and Volkswagen are accused of colluding to restrict the effectiveness of diesel emission control technologies. By jointly choosing small tanks rather than going alone, the German automakers substantially reduced the expected noncompliance penalties. The benefits to automakers and car buyers have come at the cost of grave environmental damages. The combined antitrust and environmental penalties would have to reach between 1.46 billion and 14.63 billion euros to remedy the welfare damages of this alleged collusion.

These are among the findings of a new CEPR study by Jorge Alé-Chilet, Cuicui Chen, Jing Li and Mathias Reynaert, which examines the welfare effects of the alleged collusion by the three German automakers to reduce the size of diesel exhaust fluid (DEF) tanks, an emission control technology used to comply with air pollution standards. Among the findings: 

  • Firms improve market profits by shading pollution and evade noncompliance penalties by shading jointly. 
  • The three automakers chose DEF tank sizes that were 8% less effective on average than other firms’ choices.
  • Large DEF tanks reduce firms’ profits because they take up valuable trunk space and increase marginal production costs – 
    • Estimates show that consumers would be willing to pay around 284 euros if the space for an average DEF tank were instead allocated to additional trunk space
  • Choosing small DEF tanks jointly reduced the automakers' expected noncompliance penalties by at least 560 million euros.
  • Compared with various competitive scenarios, the alleged collusion is also beneficial for car buyers. However, those benefits to automakers and car buyers come at the cost of grave NOx damages.
  • Increased pollution damages outweigh the gains in industry profits and vehicle buyers' surplus.
  • Antitrust and noncompliance penalties would reach between 1.46 and 14.63 billion euros to remedy the welfare damages of the alleged collusion.
  • The automakers gained 0.68-5.04 billion euros in variable profits from this alleged collusion, with the existing regulatory regime predicted to have achieved at most 34-46% of the full remedial penalties.
  • The study also documents widespread noncompliance behaviour in the whole industry; more than 95% of diesel models with DEF tanks have tank sizes insufficient for compliance.

These findings are essential to interpret the consequences of the alleged collusion in light of imperfect regulatory enforcement.


 

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